Update 80 MARCH 2013
ASIC CORPORATE INVESTIGATIONS AND HEARINGS
Middleton
Highlights
Original updated commentary in:
· Chapter 1: Policy and Legal Framework
· Chapter 4: ASIC Investigations
· Chapter 6: Powers Relating to Books
· Chapter 8: ASIC Proceedings on Investigations
· Chapter 9: ASIC Hearings
Chapter1:Policy and Legal Framework
Regulation
[1.175] Effective regulation
Accountability is linked to legitimacy. ASIC should be accountable for the way it exercises its powers and discretions. This means that ASIC should satisfy high standards of financial management because it is spending public money. ASIC should ensure that its procedures are fair and impartial and comply with administrative law principles. ASIC should be accountable for the substantive compliance, investigative and enforcement decisions it makes. ASIC should also ensure that its overall administration of the regulatory regime achieves its regulatory objectives. Provisions that require ASIC to explain and justify its actions are called “weak accountability mechanisms”. This may include situations where ASIC releases documents to a person as the result of that person’s request for access to those documents under the Freedom of Information Act 1982 (Cth), as discussed at [11.1360] – [11.1400]. Provisions that require ASIC to provide some other type of response if it does not meet the required standard are called “strong accountability mechanisms”. This may include situations where the lawfulness or merits of ASIC’s decisions are successfully challenged by applicants through the courts or the Administrative Appeals Tribunal, as the case may be (see Chapter 16). However, the requirement that ASIC is accountable may undermine other important principles including ASIC’s independence, expertise and efficiency (Bird J, “Regulating the Regulators: Accountability of Australian Regulators” [2011] MelbULawRw 27; (2011) 35(3) Melbourne University Law Review 739).
[1.176] Approaches to regulatory reform
World’s best practice
The federal government established the Office of Best Practice Regulation (OBPR) which administers the requirements relating to the adoption of best practice by the government and its agencies (including ASIC) in the context of government regulatory proposals and making regulations. Where there is a government regulatory proposal, there is an obligation to conduct a Regulatory Impact Analysis (RIA) and prepare a Regulatory Impact Statement (RIS). The RIS sets out the regulatory problem, relevant regulatory objectives, the range of options that could be adopted to resolve that problem, the costs and benefits of each proposal, a consultation statement, a conclusion and preferred option, and a strategy to implement the preferred option. The RIA and RIS assist to make the government and ASIC accountable because compliance with the RIA and RIS requirements are assessed by the OBPR (Bird J, “Regulating the Regulators: Accountability of Australian Regulators” [2011] MelbULawRw 27; (2011) 35(3) Melbourne University Law Review 739 at item 3).
Corporate Regulation Functions
[1.205] Promoting proper disclosure and greater transparency
Misleading or deceptive conduct - superannuation and retirement savings funds
ASIC has a number of roles in regulating superannuation and retirement savings funds (see [2.760] and [2.770]). ASIC is concerned to ensure that the advertising of financial products is not misleading or deceptive. ASIC will target advertising that may cause investors to make the wrong choices and that may cause them to invest in a product that they believe has a much lower risk than it actually has. ASIC has indicated that in 2013 it will target advertisements that falsely indicate a lower risk by misusing terms such as “capital protected, guaranteed and secure”. (Mr Kell (ASIC Commissioner), Parliamentary Joint Committee on Corporations and Financial Services, Oversight of the Australian Securities and Investments Commission, 3 December 2012, Sydney, at pp 22 and 26).
Misleading or deceptive conduct - shadow banks
A regulatory problem exists in relation to “shadow banking.” This is where debenture issuers, money market funds or other business make themselves look like a bank by offering other services to investors such as a cheque account, EFTPOS facilities and credit cards. These businesses, in effect, act like a bank, they accept savings accounts and term deposits and, investors think of them as a bank. Investors believe that when they invest with those businesses, their investments are as safe as investing with a bank when in fact those businesses do not fall within the definition of “banks” that are prudentially regulated by APRA. For example, Banksia Securities Ltd could have been described as a “shadow bank” and, it was not prudentially regulated by APRA (Medcraft G (ASIC Chairman), Mr Tanzer (ASIC) and Mr Price (ASIC Commissioner), Parliamentary Joint Committee on Corporations and Financial Services, Oversight of the Australian Securities and Investments Commission, 3 December 2012, Sydney, at pp 23-24 and 27-28).
One reform option is to broaden the definition of “banking business” so that “shadow banks” are subject to the same prudential regulation requirements (capital maintenance and liquidity requirements) as banks. ASIC has indicated that “if it looks like a bank and operates like a bank it probably should be regulated like a bank” (Medcraft G (ASIC Chairman), Parliamentary Joint Committee on Corporations and Financial Services, Oversight of the Australian Securities and Investments Commission, 3 December 2012, Sydney, at pp 21-23 and 28).
An alternate reform option is to make “shadow banks” (such as debenture issuers) look less like banks. This could be achieved by preventing them from offering “banking like” services. They could also be prohibited from using “bank like” terminology such as “deposit” and “at-call account.” (Mr Price (ASIC Commissioner), Parliamentary Joint Committee on Corporations and Financial Services, Oversight of the Australian Securities and Investments Commission, 3 December 2012, Sydney, at p 28).
Disclosure - rollover of debenture investments
Where investors rollover their debenture investments, the debenture issuer is exempt from the prospectus requirements (ASIC Regulatory Guide 69, “Debentures and notes: Improving disclosure for retail investors”, February 2012 at RG 69.27 and RG 69.45; and see s 708(14) of the Corporations Act 2001). In the context of the collapse of Banksia Securities Ltd, investors, who were rolling over their debenture investments, did not receive a prospectus or any form of disclosure about changes in risk. This was despite the fact that since the investors’ initial investments and, some months prior to Banksia Securities Ltd’s collapse, ASIC had developed concerns about the high risk of the debenture investments. ASIC had notified the relevant trustee of its concerns (See generally http://www.asic.gov.au/asic/asic.nsf/byheadline /Banksia-Securities-Limited?openDocument, viewed 21 December 2012; and Mr Price (ASIC Commissioner) and Medcraft G (ASIC Chairman), Parliamentary Joint Committee on Corporations and Financial Services, Oversight of the Australian Securities and Investments Commission,
3 December 2012, Sydney, at pp 21-22 and 28).
Minister’s Powers
[1.1260] Minister’s directions power
ASIC is accountable to the government through the Minister. Accountability is discussed at [1.175]. Section 12(1) of the ASIC Act provides that the Minister has power to direct (in writing) ASIC about the policies that it should pursue or the priorities it should adopt. Section 12(3) provides that the Minister cannot give a direction (in the context of s 12(1)) about a particular case. This directions power has been criticised on the ground that it could severely impact on ASIC’s independence from the political process and its expertise. This directions power is a strong accountability mechanism. However, it has only been used once (in 1992) when the ASC (now ASIC) was directed to improve the cooperative arrangements with the Commonwealth Director of Public Prosecutions (Bird J, “Regulating the Regulators: Accountability of Australian Regulators” [2011] MelbULawRw 27; (2011) 35(3) Melbourne University Law Review 739).
The relationship between ASIC and the Commonwealth DPP is discussed at [8.2600] – [8.2700
Chapter4:Investigations
ASIC’s Power to Investigate Suspected Contraventions
[4.480] Contraventions of statutory duty of care and diligence
“Glaring failures” by non-executive directors to discharge their responsibilities under s 180(1), including a significant departure from the standard of care and diligence reasonably expected of directors, justifies the court imposing a substantial disqualification order against them despite the absence of dishonesty. A lengthy disqualification order marks the court’s disapproval of their conduct, demonstrates that the law requires appropriate standards of conduct and deters other directors who might otherwise be tempted to breach their duties on critical matters (Gillfillan v ASIC [2012] NSWCA 370 at [234] and [252]).
[4.580] Current law – scope of statutory duty of good faith
Criminal contravention
In SAJ v R (2012) 91 ACSR 308; [2012] VSCA 243 at [5] the court held that the express inclusion of a definition of “dishonest” in ss 1041F and 1041G of the Corporations Act 2001 “positively implies, expressio unius est exclusio alterius, that such a definition is not intended to apply to s 184(2)”. The word “dishonest” is similarly defined in s130.3 of the Criminal Code Act 1995 (Cth). However, this definition is of limited application and is only relevant to the theft offences contained in ss131–132 of the Criminal Code Act 1995 (Cth) (SAJ v R (2012) 91 ACSR 308; [2012] VSCA 243 at [5], [25], [26] and [35]).
Accordingly, the meaning of “dishonesty” for the purposes of other legislation, such as s 184 of the Corporations Act 2001, must be established from the case law. In SAJ v R (2012) 91 ACSR 308; [2012] VSCA 243 at [6] and [127] the court held that the objective test of “dishonesty” in Peters v The Queen (1998) 192 CLR 493; 72 ALJR 517; 96 A Crim R 250 at 504 (CLR) applied to s 184 of the Corporations Act 2001. This means that the question of whether a person is dishonest is to be decided on an objective basis by the jury applying the standards of ordinary decent people. Accordingly, the meaning of the word “dishonest” is not to be determined on the basis of the subjective belief of the accused. In SAJ v R (2012) 91 ACSR 308; [2012] VSCA 243 the court indicated that the meaning of the word “dishonest” in s 184 did not involve the two part objective and subjective test that is used in ss 1041F and 1041G of that Act and s130.3 of the Criminal Code Act 1995 (Cth).
Chapter6:Powers Relating to Books
[6.600] Meaning of fraud or dishonesty
Section 28(c)(ii) of the ASIC Act provides that ASIC may exercise its power to require the production of books where it is investigating a suspected contravention of Commonwealth law that involves fraud or dishonesty. Whether the approach in Peters v The Queen (1998) 192 CLR 493; 72 ALJR 517; 96 A Crim R 250 at 504 (CLR) to the meaning of the word “dishonest” applies to s28(c)(ii) of the ASIC Act is yet to be judicially determined.
[6.1620] Why and how notices must be served
Section 109X of the Corporations Act 2001 does not expressly provide that its provisions may be rebutted. However, s 109X is “permissive and facultative only” and its provisions may be rebutted where the corporation proves, on the balance of probabilities, that there was non-delivery. Where the court is satisfied that there is sufficient evidence of non-delivery or non-receipt (even though the letter was prepaid and properly addressed to the registered office of the corporation), the provisions in s 109X of the Corporations Act 2001, and the presumptions in s29 of the Acts Interpretation Act 1901 (Cth) and s160 of the Evidence Act 1995 (Cth) do not apply. In such a case, the relevant notice has not been validly served (Deputy Commissioner of Taxation v Starpicket Pty Ltd [2012] FCA 1196 at [72] – [75] and the authorities cited therein).
Chapter8:ASIC Proceedings on Investigations
CIVIL PROCEEDINGS
Proceedings for Contravention of Civil Penalty Provisions – Civil Penalty Orders
[8.1500] Pecuniary penalty order
Parity principle
The court should give due recognition to the different degrees of culpability and the different circumstances of each co-contravenor when determining the penalties to be imposed on co-contraveners (Gillfillan v ASIC [2012] NSWCA 370 at [206]).
If the civil penalty imposed on a co-contravener is used as a “yardstick” for the civil penalty to be imposed on the defendant, the court should identify the similarities and differences between the contraventions of both persons. If identical civil penalties are to be imposed, the court should carefully consider whether the defendant’s circumstances warrant equal treatment. If the court decides that different civil penalties should be imposed on co-contraveners, the court should justify and explain its reasons for imposing different penalties (Gillfillan v ASIC [2012] NSWCA 370 at [195]).
[8.1560] Court power of disqualification – contravention of a civil penalty provision
Section 206C(1) of the Corporations Act 2001 does not give the court power to disqualify directors where there has been a contravention of a financial services civil penalty provision.
ASIC Act - unconscionable conduct or consumer protection in relation to financial services
The court has power under s 12GLD of the ASIC Act to disqualify directors where they have contravened the provisions in that Act relating to unconscionable conduct or consumer protection in relation to financial services (other than s 12DA – misleading or deceptive conduct).
Financial services banning orders and continuing as directors
A person could be banned by ASIC under s 920A of the Corporations Act 2001 from providing financial services (see [9.103]) but that person could continue as a director of a financial services corporation. There have been reports that such persons have informed clients that “it is business as usual” (Parliamentary Joint Committee on Corporations and Financial Services, Statutory oversight of the Australian Securities and Investments Commission, August 2012, at [2.10]).
The problem is that there is no real correlation between the criteria to obtain an Australian Financial Services Licence or the criteria governing ASIC’s power to make a financial services banning order on the one hand; and the qualifications to be a director or the grounds to disqualify a director, on the other. This matter is discussed further at [1.160] and [9.103].
Criteria governing the court's power of disqualification
Section 206C(2) of the Corporations Act 2001 is wide enough to permit the court to consider the penalties imposed or to be imposed on other contraveners who committed similar contraventions (Gillfillan v ASIC [2012] NSWCA 370 at [194]).